Socialism Produces Either Chaos or Stagnation

An advanced capitalist economy can be converted into full-blown socialism, but on one condition: nothing in it would from then on ever change for all time.

There are some complications: the present economy is partially disequilibrated, and a transition to socialism will need to outlaw any future entrepreneurial actions and wait until equilibration somehow finishes. Further, preserving the state of equilibrium may prove difficult: the new generation may have different consumer preferences; there will be environmental changes and acts of God; foreign trade will muddy matters considerably. But abstracting from these, socialism is possible. There will be no new products, no new technologies, no new methods of production, no new factories, tools, or equipment. Whatever exists, will be maintained against the entropic forces, but that’s the extent of it. Each new generation will inherit the lifestyle of the old generation and will not improve in its own standard of living in any way. Each day will be just like every other day.

Such was indeed the manner of life for most of the human history before the ideological / industrial revolution that inaugurated the liberal capitalist age.

Now every evenly rotating economy is also stationary, i.e., one in which the people’s wealth and income and living standards do not change; not every stationary economy need evenly rotate. An ERE is marked by no changes and no improvement; a stationary economy, by some changes yet still no improvement. An ERE thus represents absolute stagnation; while a stationary economy permits minor adjustments though also fails to progress.

A stationary economy is compatible even with the existence of profits and losses. Thus, a capitalist economy can in principle stay put / shrink, if the sum of all entrepreneurial profits in it is perfectly counterbalanced by / outweighed by the sum of all losses. This is because profits signify that resources were reallocated well relative to their previous manner of use; losses, that they were reallocated poorly. In such a case the creative advance and destructive retreat cancel each other out, resulting in no overall change for the better. For example, during a business cycle, there may be frenetic activity that for all that fails to bear any fruit and results in mass losses at the end. Government interventionism has thereby caused social retrogression. Nevertheless, socialist stagnation is fundamentally different from merely interventionist stagnation. And under laissez-faire we can almost always observe continuous and speedy progress.

It would therefore be sufficient to prove that a socialist economy is at best stationary. However, we can assert even more, i.e., that socialism all but requires an ERE, because centrally shuffling resources between projects and factories within a country is a computationally intractable problem. The present argument is then a fortiori: if a socialist economy can survive only by evenly rotating, then by a still stronger reason it is stationary.

Compare and contrast now the old USSR with Cuba.

The chaos of the Soviet economy arose precisely because its central planners had the ambition to imitate the market and change things. They tried to improve their economy. When they did, the coordination between its parts broke down completely. A factory needed small nails for a new project; there were no small nails, only large ones. A collective farm needed a part to repair a tractor; the part was nowhere to be found; though by bribing some officials, a different and useless part could after a time be procured. Nothing connected; nothing worked. Production ground to a halt.

Take a look now at Cuba. In the Soviet Union, people were perpetually pestered with futile slogans like “Catch up and overtake America in the production of milk and meat!” Cuba would have none of that. What a “happy” country it is. People in it just sort of exist, like plants. (Not that they like it, mind you. Cuba is a tropical island without boats, where boats are outlawed, because if people could get their hands on them, they’d leave en masse.) It looks the same as it did in the 1950s. Since socialism was established in it, Cuba contributed nothing to the development of civilization. It hasn’t died out from famines, which many socialist countries have experienced, but it’s a completely arrested economy.

So, Cuba was smart enough not to ape the Soviets. Moreover, you might think, “The 1950s were a simpler and happier time.” Perhaps. But only coupled with the ability of the people to improve their lives. “It is in the nature of man continually to strive for an improvement in his material condition,” says Mises. “If he is forbidden the satisfaction of this aspiration, he becomes dull and brutish.” The world they and we have built is more complicated, but it was by our own choice. The Cubans are not enjoying their forced relaxation. Moreover, consider what will happen in 100 years. In America, it will be 2117. The wonders of that time will be amazing and numerous. All nostalgia for the 1950s will be long gone, and Cuba will be seen for what it is: a bizarre ancient decrepit museum.

If we reject both the crazy approach to the economy (USSR’s chaos), the ugly approach (Cuba’s stagnation), and the stupid approach (American-style interventionism), we arrive at the only reasonable option: laissez-faire capitalism.

The Austrian school of economics grasps this crucial issue of the market process which is the only means by which improvements into the economy can be orderly and rapidly introduced. Here’s a great recent article: Ryancare’s Fatal Logical Flaw. Note the appropriate reference to the market process: the proposed free market reform “is the only way to increase supply, improve supply, and by doing so bring costs down.”

Related Posts

Socialism is an unnatural attempt to change the entire world into an enforced universal egalitarian slavery.
It bears no relation to ancient tribal equality which was a legitimate and essential economic stage.
Socialism tries to realize envy, which can be primitive or more sophisticated; but it's destructive in both guises.

Did I (and Mises) just solve “the most important open problem in the field” of computer science? Well, I’d have to prove that no fast algorithm for solving the socialist computation problem exists, which I

I have described the socialist computation problem as consisting of two parts: first, to solve the system of linear equations (consisting of a vast number of entries and featuring numerous factors of production), generating shadow